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NEW DELHI: More than a quarter of India’s micro, small and medium enterprises (MSMEs) have lost more than 3% market share due to the covid pandemic, while half of them have seen their profits before interest, taxes, depreciation and amortization (EBITDA) to contract due to a sharp rise in commodity prices in the last fiscal year compared to pre-pandemic levels (fiscal year 2020), according to a report on SMEs 2022 from CRISIL Research.

Admittedly, assessing the impact on MSMEs has been a real challenge due to information asymmetry and lack of high-frequency data points.

The CRISIL report covered 69 sectors and 147 clusters which recorded cumulative revenues of 47 lakh crore, representing 20-25% of gross domestic product (implying coverage of two-thirds of the MSME universe).

“SMEs across multiple industries saw market share decline by more than 3% and Ebitda margin erode compared to last fiscal year 2020. For example, supply chain disruptions driven by pandemic have hit smaller pesticide manufacturers harder.On the other hand, large companies have leveraged their global presence to source raw materials, and could therefore nibble a huge slice of the SME pie. Edible oils lost market share as an increase in the hygiene quotient due to the pandemic resulted in fewer buyers for the oil sold in bulk Pesticide and edible oil SMEs suffered a contraction in their margins of 100 basis points and 200 basis points, respectively, due to partial pass-through – less than 60% – of higher raw material costs,” said Pushan Sharma, Director of CRISIL Research.

Interestingly, 40% of SMEs have barely lost market share due to their “essential” nature, such as pharmaceuticals, agricultural millers, or by virtue of their high market share, such as the brass.

A handful of sectors, such as steel casting, gained market share where only SMEs were able to take advantage of the recovery in infrastructure demand, with large factories consuming their output captively. As the majority of tobacco outlets remained closed due to health concerns, tobacco processing SMEs, which mainly sell loose tobacco and bidis, gained market share.

Soaring input costs have weighed heavily on industries that operate in low-margin products with limited pass-through. CRISIL expects transport operators, edible oil, gemstones and jewelry to be the most vulnerable to Ebitda losses due to a thin margin of

Despite an increase in freight rates, the Ebitda margin of small fleet operators was impacted by 50 basis points in fiscal 2022, compared to fiscal 2020, due to the limited pass-through of costs (~50%) from the increase in the cost of fuel which represents approximately half of the total Cost.

“In the midst of the pandemic and the current geopolitical crisis, sectors such as textiles and pharmaceuticals have offered a ray of hope for exports. Cotton yarn exports have benefited from the US embargo on Chinese-made items in Xinjiang, in addition to the China+1 policy. The apparel industry, with a 70% share of MSMEs, has benefited from China’s supply constraints and emerging global opportunities. Exports of pharmaceutical products soared on pandemic-related demand, even as the domestic industry grappled with falling demand in volume. In the future, Tirupur-based MSME garment manufacturers may benefit from export orders diverted from economically struggling Sri Lanka,” said Elizabeth Master, Associate Director of CRISIL Research.

Against this backdrop, MSMEs are expected to see their revenues grow by 9-11% this fiscal year to 1.25 times the levels seen in 2020, although Ebitda margin is expected to remain within a 5-5 range. 5%.

While the industry’s Ebitda margin is expected to reach pre-pandemic levels this fiscal year, MSMEs in more than half of the sectors will reverse the trend. The performance is also disappointing in the context of all Indian businesses, which are expected to see a 10-14% increase in revenue and an Ebitda margin of 19-20%.

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